Economic Snapshot for Latin America
September 16, 2015
Economic growth tumbles in Q2, low commodities prices hurt the region
After a remarkable deceleration in the first quarter of the year, Latin America’s economy is expected to have deteriorated further in the second quarter. According to a preliminary estimate elaborated by LatinFocus, the region’s economy contracted 0.3% in Q2 over the same quarter last year (previous estimate: +0.1% year-on-year), which was below the 0.2% increase registered in Q1. If confirmed, Q2’s estimate will represent the first contraction since Q3 2009. The region’s economic growth was dragged down by a deep recession in Brazil. The Brazilian economy contracted 2.6% on annual basis in Q2 (Q1: -1.6% yoy), which had an inevitable impact on the region as Brazil is Latin America’s biggest economy. Moreover, the region’s growth dynamics for the second quarter continued to be weighed down by worsening economic conditions in Venezuela.
The global financial shockwave set off by the Chinese yuan’s devaluation, as well as the proximity of the Fed hiking interest rates in the U.S., triggered another fall in commodities prices and prompted a massive depreciation in Latin America’s currencies. Many of the region’s major currencies hit multi-year lows in August, and commodities producers, particularly oil and metals producers such as Chile, Colombia, Mexico, Peru and Venezuela, were the most affected. Latin America is the emerging region that is most exposed to commodity-price fluctuations, and low commodities prices affect the countries’ exports, currencies, investment and fiscal revenues. This occurs through a few specific channels: a worsening of the trade balance leads to a currency depreciation, a lower return on projects has a negative impact on investment, and a decrease in government’s revenues causes less fiscal spending. While an impact on investment due to a lower return on projects directly affects economic growth, a worsening trade balance and a decrease in government revenues prompt an increase in the twin deficits (current account and fiscal deficits), which limits the use of countercyclical monetary and fiscal policies that could mitigate the impact of the commodities price slump.
Region’s economic outlook is deteriorating rapidly
Prospects that Latin America’s economy will recuperate this year are not in the cards. An economic deceleration in the majority of the region’s economies and deteriorating conditions in Brazil and Venezuela are weighing on the region’s economic outlook. Latin America is expected to experience tepid economic growth this year and the group of analysts surveyed for the LatinFocus Consensus Forecast this month slashed the region’s GDP growth forecast from the 0.4% expected last month to 0.1%. September’s projection is now a fraction of the 1.5% that the panel of analysts had predicted in January. Moreover, as a low global commodities prices are expected to persist after this year comes to an end, analysts also reduced the region’s economic prospects for next year. For 2016, economists expect Latin America’s economy to increase 1.4%, which is down 0.4 percentage points from last month’s forecast.
On a country basis, forecasters cut the economic outlook for six major commodities-producers in the region (Brazil, Chile, Colombia, Mexico, Peru and Venezuela) and also lowered GDP growth prospects for Ecuador and Uruguay. Meanwhile, the economic forecasts for Argentina, Bolivia and Paraguay were left unchanged over the previous month.
BRAZIL | Economy enters into recession in Q2, poor economic outlook deteriorates fiscal position
Brazil’s economy contracted more than expected in the second quarter of 2015 and entered into technical recession. Latin America’s largest economy was dragged down by a deterioration of both domestic and external demand. Corruption scandals have pushed confidence levels to record lows, weighing on private consumption and fixed investment, while lackluster external demand and low commodity prices took a toll on the external sector. More recent data suggest that the economy is continuing to struggle at the outset of Q3. Industrial production shrunk in July and confidence levels remained depressed in August. The economy’s poor performance has hurt tax revenues and on 31 August, the government presented a budget with a primary deficit for the first time in Brazil’s modern history. The budget confirms that the government’s efforts to correct the country’s sinking finances have come up alarmingly short. Moreover, corruption scandals have eroded the government’s support in Congress and led to the watering down or stalling of key legislation.
LatinFocus panelists see the economy recording its largest contraction since 1990 this year. Austerity measures, high inflation and depressed confidence are expected to dampen private consumption further and cement the economy’s downward trajectory. LatinFocus panelists see the economy contracting 2.4% in 2015, which is down 0.7 percentage points from last month’s forecast. For 2016, panelists see the economy remaining in a contraction and falling 0.3% (previous estimate: +0.3%).
MEXICO | Economy slows in Q2, government submits austere budget for 2016
Mexico’s economy has been struggling to gain momentum since the start of the administration of Enrique Peña Nieto and, in Q2 2015, GDP registered another quarter with sub-3.0% year-on-year growth. GDP increased 2.2% in the second quarter, which was slower than the 2.6% rise seen in Q1. What can be extrapolated from recent data is that a vigorous rebound in economic activity in the coming months is not likely. In September, the Peña Nieto administration began its second term within a context of lower oil prices, tougher financial conditions and a weaker currency. On 8 September, the Ministry of Finance submitted the 2016 draft budget to Congress in which emphasized its commitment to maintaining fiscal consolidation and macroeconomic stability.
Increased volatility in financial markets, a more pessimistic view on oil output and the slash in government spending has caused Mexico’s economic outlook to deteriorate marginally. Analysts surveyed by FocusEconomics for this month’s LatinFocus Consensus Forecast trimmed the country’s projection from the 2.5% expected last month to 2.4%. Due to the government’s spending cuts next year, the panel also revised Mexico’s 2016 outlook and now expect the economy to grow 3.0%, which is down from the previous 3.2% estimate.
ARGENTINA | Data suggest positive momentum carried over into Q2
Recent data suggest that the positive momentum in Argentina’s economy carried over from Q1 into Q2. In June, economic activity accelerated for the fifth straight month and consumer confidence sustained the upward trend that has been in place since the beginning of 2015 in August. Nevertheless, exports continued to record double-digit contractions mainly reflecting a slowdown in China and lower commodity prices. Following Daniel Scioli’s win in the primary presidential elections last month, recent opinion polls show that voter preferences have not changed much ahead of the 25 October elections. Scioli has pledged to continue the current government’s popular welfare programs while also promising gradual reforms towards more open markets. Adding to that, dwindling reserves will likely prompt the next government to seek a deal with the holdouts in order to regain access to international capital markets.
Expectations that a new government will implement more orthodox economic policies, coupled with a gradual recovery in commodity prices, will support the economy going forward. Moreover, a recent agreement between YPF, the state-run energy company, and Russia’s OAO Gazprom is expected to develop Argentina’s oil and gas industry. This month, LatinFocus Consensus Forecast panelists kept their GDP forecast unchanged at the previous month’s 0.6% growth. For 2016, the panel expect GDP to grow 1.2%.
VENEZUELA | Economy faces a storm ahead of national elections
As Venezuela’s congressional election approaches, evidence suggests the country’s economic situation is worsening. While the data drought continues—the Central Bank still has not released GDP figures for Q4 2014 or inflation data since December—the bolivar traded in the parallel market surpassed 700 VEF per USD in September and evidence suggests that shortages of basic goods are increasing and inflation is rising. Moreover, local reports of looting have increased in recent months, pointing to high social tension ahead of the elections. The government’s popularity has fallen notably and early polls show that the fragmented opposition has a chance at winning a majority in Congress. However, Venezuela’s electoral structure favors rural areas, which traditionally support the government, suggesting that even if the opposition garners over 50% of the national vote it may not be able to unseat the government.
Venezuela’s prospects are grim. Recession, low oil prices and runaway inflation have pushed the country into a full blown economic crisis. Moreover, the government has a number of debts due at the end of 2015 and throughout 2016 and it is unknown if it will be able to fulfill them. LatinFocus Consensus Forecast panelists see a 6.6% contraction in GDP for 2015, which is down 0.3 percentage points from last month’s forecast. For 2016, the panel sees GDP falling 2.9%.
INFLATION | Despite rising inflation, inflation expectations moderate
According to a gauge elaborated for the LatinFocus Consensus Forecast, inflation in Latin America rose from 15.5% in July to 15.9% in August. While inflation in Argentina moderated in August, it did remain at a double-digit rate. Meanwhile, in Venezuela—where official statistics have not been released—analysts estimate that inflation increased from 141.8% in July to 149.0% in August. Elsewhere in the region, inflation rose in Bolivia, Chile, Colombia, Paraguay, Peru and Uruguay in the same month.
On the monetary policy front, many Central Banks across the region continue to endorse a wait-and-see approach to setting monetary policy rates until the Fed makes a move. Peru’s Central Bank was the only exception. Peruvian monetary authorities decided, on 10 September, to raise interest rates by 25 basis points to 3.50% in a pre-emptive move, while pointing out that the Bank has not begun a sequence of hikes in its monetary policy interest rate.
This month, our panel of analysts cut Latin America’s 2015 inflation forecast from 17.6% in August to 16.5% in September. The result reflects the fact that panelists foresee a lower inflation rate in Argentina and Mexico. Conversely, the 2015 inflation outlook for seven economies was raised over the previous month. The situation in Venezuela is concerning as inflation is now expected to surpass the 150% mark at the end of 2015. For 2016, inflationary pressures in Latin America are expected to fade gradually and analysts see inflation ending the year at 14.5%.
Written by: Ricardo Aceves, Senior Economist
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Latin America Economic News
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In August, industrial production contracted 1.2% over the previous month on a seasonally-adjusted basis, which was an improvement from the revised 1.5% decrease seen in July and overshot market analysts expectation of a 1.6% fall.
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Business sentiment fell in September, according to the Getulio Vargas Foundation (FGV, Fundaçao Getulio Vargas) business confidence indicator.
October 1, 2015
The Markit manufacturing Purchasing Managers’ Index (PMI) rose from August’s 45.8, which had marked the lowest reading since September 2011, to 47.0 in September.
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In September, the consumer confidence index published by the Getulio Vargas Foundation (FGV, Fundaçao Getulio Vargas) fell a seasonally-adjusted 5.3% over the previous month, which followed the 1.7% decrease recorded in August.